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Oil Prices Near Three-Month High As Market Tightens

Oil prices rose early on Monday, extending last week’s gains amid rekindled hopes that the U.S. and China could reach a trade deal and growing signs of a tightening market, driven by OPEC’s production cuts and U.S. sanctions on Iran and Venezuela.

At 07:38 a.m. EST on Monday, WTI Crude was trading up 0.80 percent at $56.43, while Brent Crude eased off earlier gains to trade down 0.02 percent at $66.24.

On Friday afternoon, oil prices reached their highest in three months and the highest so far this year, with Brent Crude exceeding $65 a barrel for the first time since November 2018. Bigger-than-expected cuts from OPEC and its de facto leader and largest producer Saudi Arabia helped push prices up. This bullish signal combined with renewed optimism coming from both the United States and China that they had made some progress in last week’s trade talks.

Representatives of the world’s two largest economies will be meeting in Washington this week for another round of trade talks and the markets, including the oil market, are currently banking that the worst of a trade war could be averted and some sort of deal could be reached.

“[W]e are looking at the tightest H1 crude balance in many years and, as such, a certain degree of price support does simply make sense for the time being,” Reuters quoted consultancy JBC Energy as saying in a note on Monday.

It came as no surprise whatsoever to me that Brent crude has surged above $66 a barrel. In November last year Brent crude hit $87. The same fundamentals that underpinned oil prices in November are still at play today. Therefore, I expect oil prices to go beyond $80 this year. I hasten to add that the current surge in oil prices has nothing to do with US sanctions on Iran and Venezuela.

At last bullish influences in the global oil market are starting to assert themselves strongly.

The first bullish influence is the strict adherence by OPEC+ to the agreed production cuts and Saudi Arabia’s intention to implement deeper production cuts from March this year to ensure prices rise beyond $80 a barrel being the price Saudi Arabia needs to balance its 2019 budget.

Another bullish factor at play now is that the global oil market casting aside claims by the US Energy Information Administration that US oil production will average 12.4 million barrels a day (mbd) in 2019 compared with 10.9 mbd in 2018 and averaging 13.2 mbd in 2020. The market is starting to realize that US oil production in 2019 and beyond is going to be slowing down fast particularly after the many authoritative reports speaking of a slowdown in the Permian. The bulk of US shale oil production has recently been coming from the Permian particularly after the decline of both the Bakken and the Eagle Ford shale plays in 2016. The Permian is projected to flatten by 2020 with growth slowing down from 860,000 barrels a day (b/d) in 2018 to a mere 230,000 b/d barrels by 2020 to OPEC (2018 World Oil Outlook). Such developments definitely argue against any pronounced rise in US oil production in 2019 and beyond. An eventual plateau in Permian oil supply will have profound implications for long term oil prices.

A third bullish influence is that representatives of the world’s two largest economies will be meeting in Washington this week for another round of trade talks and the markets, including the oil market, are currently banking that the worst of a trade war could be averted and some sort of deal could be reached.

A fourth influence is that China’s imports and exports rose faster than expected in January dispelling unfounded fears about a slowdown in the Chinese economy. Moreover, China’s oil imports continue to rise robustly projected to exceed 11 mbd.

As for US sanctions on Iran, the Trump administration has no alternative but to renew the sanction waivers it issued to eight countries buying Iranian crude or issue new ones when they expire in May if for no reason than to use them as a fig leaf to mask the fact that its sanctions have so far failed to cost Iran even a single barrel of oil and that its zero exports option is not within reach.

The reason the global oil market was unmoved by US sanctions on Venezuela is that Venezuela’s exports of 500,000 b/d to the US can be redirected to China, India and the European Union (EU). India said it will continue to buy Venezuelan crude despite US National Security Adviser John Bolton’s warning to countries of the world not to buy Venezuelan oil. India is one of the main buyers of Venezuelan crude to the tune of 400,000 b/d.
Furthermore, these sanctions will hardly impact on the global oil market and prices unless there is a complete collapse of Venezuela’s oil industry as a result of a general strike by workers of the National Oil Company of Venezuela, PDVSA, or a civil war.

The #1 user of oil showed an increase in cride stockpiles last week maintaining glut levels never seen prior to 2015.

The #1 swing producer/exporter of crude exported 415M barrels per day to the #1 user last week, about 1/3 of it's normal shipments.

What actual observable and measurable data point shows there is a market tightening?

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